Fortescue’s Forrest bullish on iron ore sector

Fortescue Metals Group
chairman
Andrew Forrest
remains bullish about the future of the iron ore sector and says the current volatility in prices will settle at a sustainable level.

West Australian premier
Colin Barnett
and Mr Forrest, have played down concerns over the end of the mining boom, saying $160 billion worth of projects would still drive the state’s economy. Mr Barnett told Financial Review Sunday, that claims WA was on the brink of recession following the dip in commodity prices and a slowing in the pace of mineral development activity were off the mark.

“There’s still basically $160 billion of resource projects either in construction or going into construction in Western Australia, so it’s coming off its peak but that’s all that’s happened," he said.

Mr Forrest wrote off some forecasters’ predictions of an iron ore price of $US80 ($86.51) per tonne in the near to mid-future. Goldman Sachs is forecasting an iron ore price of $US80 for 2015 as the market switches into oversupply.

Andrew Forrest ... industry sustainable.
Photo: Nic Walker

But Mr Forrest said such predictions underestimated the response from higher-cost suppliers who would likely halt production at that level.

“I think that’s underestimating the fact there’ll be a supply response at any level like that," he said. “That’s really thinking the domestic industry in China can keep going at that price and that the very undercapitalised Indian iron ore export industry can survive at that price."

Changes are purely cyclical

Mr Forrest declined to name a price he believed the commodity would settle at but said long-term demand from the developing world would keep the industry sustainable.

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“The iron ore price may be strong, it may be weak, but generally it’ll work around the current price in the longer term," he said. “It will settle on a level which allows sufficient investment into the industry to be able to meet the long-term demands of the developing world. I can’t tell you if that’s at $US130 or that’s at $US100. I can say that the long-term future of China is very sound and the long-term economy of Australia and Western Australia is just as sound.

“I think this is purely cyclical and nothing that should concern us– or prevent long-term planning."

Mr Forrest conceded softer prices meant the industry was unlikely to see a flurry of emerging junior miners like it has in the past few years. Fortescue estimated its own production costs at between $US45 and $US50 per tonne in a corporate update issued last week, as it continues to cut costs across the business. Fortescue shares have more than halved over the past year as the company grappled with debts of $US10 billion and market attitudes to mining softened.

The sharp fall in iron ore prices to $US87 in September last year left Fortescue’s operations barely profitable, and the miner laid off 1000 staff in reaction. Since then it has built staff levels back up as it pushes ahead with expansion projects in the Pilbara. After starting the year at $US150 per tonne the iron ore price dipped as low as $US111 this month before recovering to $US120 on Friday.

Last week, Brazilian iron ore miner Vale said it believed increased supply over the next three years could force the iron ore price towards $US90 a tonne.